Taxing Overseas Firms for SOX Compliance

06.17
DW Content Writer
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The Sarbanes-Oxley Act, also called the Public
Company Accounting Reform and Investor Protection Act of 2002 was signed
into law on July 30, 2002 by President Bush. In the aftermath of Enron,
Arthur Andersen, Global Crossing, and WorldCom, SOX promises greater
corporate accountability and transparency. Named after Senator Paul
Sarbanes and Representative Michael G. Oxley, SOX focuses on the
importance of ethical behavior in corporate governance-across the United
States and now…overseas.

All countries have government-required laws like Sarbanes Oxley. In
the UK, it’s the "Combined Code on Corporate Governance," in The
Netherlands it’s the "Code Tabaksblatt," Germany has a "Bilanz Reform"
and a "Bilanz Kontroll Gesetz." But then, why do we need SOX overseas
since we already have the required laws? It’s because companies with
U.S. headquarters must ensure that all foreign outposts meet federal
standards. This is the major cause of concern in the management and
accounting circles. According to some experts, the Sarbanes Oxley Act
might have dictated convoluted rules and regulations on the U.S.
businesses. While the rules are concrete ideologies that prevent
accounting scandals, the constant flux in the policies confuses
businesses around the globe.

SOX compliance by vendors and business partners outside the U.S. is a
frightening task. The risks and complications involved in enforcing the
regulations for multiple firms around the world are enormous. The U.S.
firms should keep themselves abreast of the data operations and data
management followed by overseas vendors. This complicates the case
further as the data should be integrated in financials or entered in
balance sheets. Cumbersome processing of data would step up IT-related
expenses.

The global impact of SOX is tremendous. At the moment, the UK Big
Four firms are feeling SOX repercussions in their consulting sectors.
http://www.big4.com -a website for global Big4 alumni - receives
periodic updates on the latest news and trends at the Big Four firms.
The Big Four in UK reportedly lost GBP250 million in consulting fees
since 2002-a direct outcome of Sarbanes-Oxley Act. Among the Big Four
firms, PricewaterhouseCoopers faced a huge decline in their consulting
fees. Causes for this decline can be attributed to:
·The increased cost of compliance that usurped consulting budgets.
·Independence restrictions in Sarbanes-Oxley have restrained
companies from utilizing their auditors for many consulting services.

There is an apparent role reversal in consulting fees and audit
services. If consulting fees have declined, audit fees have considerably
increased. A whopping 30% increase in Big Four audit fees has been
observed over a period of two years. This spike does not compensate for
the revenues lost for consulting. Consulting was the major strength of
the Big Four in the UK. But, in the present conditions, the significant
decline in consulting fees clearly demarcates the performance of the Big
Four in the UK.

According to a survey by an European firm, many overseas firms with
their shares listed in the U.S. were not ready to meet the deadlines of
Sarbanes-Oxley. Since European firms already have specific regulations,
SOX compliance is extremely difficult. Some overseas firms have been
attempting to get delisted from the U.S. stock markets since SOX’s
inception. Foreign firms about to get listed on overseas exchanges are
also resisting to get listed in the U.S. These problems would take toll
on the U.S. market performance and economy. But, the exit of foreign
firms from the U.S. exchanges is not that easy. As per SEC guidelines,
foreign firms holding 300 or more shareholders in the U.S. cannot delist
from the U.S. exchange where they trade.

In the light of these problems, the Securities and Exchange
Commission-in its bid to offer sustained flexibility-started modifying
rules for overseas firms listed in the U.S. The SEC would facilitate
foreign firms to delist their securities that are traded on the U.S.
exchanges. Modifying SEC rules to accommodate European firms would
create a state of unrest among the American managements.

The SOX compliance should be an “all-encompassing” formula-that
which enables governments and managements worldwide to function
efficiently and in rhythm. A level headed approach to weed out this
disconcert would improve the situation.